The Big Pharmas - Part 4 - Regulations and Price Controls

3witches We started this series on the world’s largest pharmaceutical companies by looking at who and where they are. We then covered the extremely complicated series of phases that a new drug goes through between the discovery of a potentially beneficial compound and being allowed to go to market. After targeting a disease or condition there are pre-clinical trials, sometimes involving animals, tests on healthy volunteers and extensive tests on volunteer patients.

Although it can take hundreds of millions of Dollars and ten to fifteen years to bring a drug to market, it’s not all plain sailing after that. In Part 3 we looked at the intense competition that they face from each other, generic drug manufacturers and other health care manufacturers. They also face competition from counterfeit prescription drug manufacturers, many of them based in China. Between 200,000 to 300,000 people are reported as having died each year in China as a result of counterfeit or substandard medicine and those are just the reported cases. This illegal business will probably generate $75 billion in annual revenues by 2010.

Types of regulation
Pharmaceutical companies have to operate in a highly regulated environment. Given the potential, often life threatening, nature of a failure in one of their products, that’s very understandable. The degree of regulation depends on the country and the type of product. There are many types of regulation, including:

Drug approval.
Use of animals and humans in trials.
Marketing restrictions.
Manufacturing and distribution regulations.
Price controls.
Legal liability for drug side effects.
Patent eligibility and lifetimes.

Drug approval
We looked at the drug approval process in the article on R&D. The companies conduct multi-phase trials and submit the results and conclusions to one or more regulatory authorities before being allowed to put a new drug, or one manufactured with different ingredients or processes, onto the market. The main regulatory authorities in the United States are the Medicines and Healthcare products Regulatory Agency (MHRA) and the National Institute for Health and Clinical Excellence (NICE). Almost every country in the world has similar organizations. The European Medicines Agency is attempting to set uniform requirements across the European Union member countries. The extensive documentation requirements are so stringent and diverse that a whole industry has grown up around recording, presenting and submitting the data from trials and preserving and monitoring manufacturing data.

The use of animals and humans in trials.
Humans must obviously be involved in new drug trials as there is no way to be sure that a compound works and has no unacceptable side effects, other than to allow anybody to release untested drugs and be liable for the consequences. That would clearly be unacceptable, particularly if people were permanently damaged or died.

Animal experimentation is a different matter altogether. Some religions teach respect for all life and frown upon killing even harmful species, such as mosquitoes. Nobody seemed very worried about testing new drugs on mice or rats for many years. After all, most people would regard them as pests. A very different attitude emerged when people discovered that household pets and primates, such as monkeys, were being subjected to pre-clinical trials, often suffering or dying as a result.

The pharmaceutical company researchers argue that they must establish the effectiveness of a drug in reaching its target and combating a condition or disease and that current knowledge isn’t sufficient to allow a jump from theory and computer simulations to humans without taking huge and unacceptable risks. Many people, especially animal rights activists, argue that the practice is unacceptable and that other experimental techniques must be found. “Some medical schools and agencies in China, Japan, and South Korea have built cenotaphs for killed animals. In Japan there are also annual memorial services for animals sacrificed at medical school.” – Wikipedia.org

The “People for the Ethical Treatment of Animals” (PETA) organization is a well established forum. Its mission statement says – “…(PETA), with more than 2 million members and supporters, is the largest animal rights organization in the world. PETA focuses its attention on the four areas in which the largest numbers of animals suffer the most intensely for the longest periods of time: on factory farms, in laboratories, in the clothing trade, and in the entertainment industry. We also work on a variety of other issues, including the cruel killing of beavers, birds and other ‘pests,’ and the abuse of backyard dogs. PETA works through public education, cruelty investigations, research, animal rescue, legislation, special events, celebrity involvement, and protest campaigns.” Unfortunately, there are also extremist groups whose activities are so dangerous to property and people (and sometimes even the animals that they say they are defending or rescuing) that they have been classed as terrorist organizations in many countries.

This is clearly an issue that also distresses researchers and other employees at the Big Pharmas. To their credit, there are many pharmaceutical industry initiatives to try to reduce and eventually eliminate the need for experimentation involving animals. As an example, ten major pharmaceutical companies are taking part in an international data-sharing initiative to drive down the need for animal testing. They will share data on the effects of compounds so as to avoid duplication of experiments and unnecessary tests on animals. In Europe there are initiatives such as Registration, Evaluation and Authorisation of Chemicals (REACH). It will require pharmaceutical companies to formally verify the safety of the chemicals they use and to share data.

Marketing restrictions
The Big Pharmas spend billions of Dollars on marketing and advertising campaigns. They obviously need to spread the word about teh benefits of their products. For many years they primarily targeted physicians and pharmacists, often holding extravagant “educational” events and symposia to tout their wares. The potential ethical problems, bordering on bribery in some cases, lead many large facilities to severely restrict access to their staff and to channel all information about drugs and other treatments through tightly controlled channels.

Unfortunately, the Big Pharmas didn’t give up on their efforts to influence the decision makers. On September 2, 2009, Pfizer Inc. was fined a record $2.3 billion for illegal “off-label” drug marketing. This involves the unauthorized marketing of a regulated drug for purposes other than the ones it was tested and approved for. We covered the issue in full in an article published that day.

There are strict regulations on the claims that a drug manufacturer can make about its products. They also have to disclose side effects in advertising and articles promoting their products and in package labeling. In recent years the drug companies have started targeting consumers directly, urging them to contact their doctor about their new product. That’s something that the doctors hate, of course. We sometimes laugh at the side effects listed at the end of a drug ad. They often seem a lot worse to us than the condition that the drug is supposed to control.

Manufacturing and distribution regulations
The drug manufacturers have an implicit interest in maintaining the quality of their products, all the way from testing ingredients and monitoring manufacturing processes to using adequate packaging to lengthen shelf lives. With modern, generally computerized, manufacturing techniques, the overall standard of the finished product is probably as close to perfect as will ever be achieved. However, the notorious Tylenol incidents in 1982 forever changed two aspects of the industry. Some people died mysteriously as a result of taking Tylenol tablets. The problem was quickly found to be poisoning as a result of tampering with the product. The poisonings involved Extra-Strength Tylenol medicine capsules which had been laced with potassium cyanide. Nobody has ever been charged with the murders.

The Tylenol incident is notable for two reasons. Manufacturers immediately introduced more stringent monitoring and tamper proof packaging. It also caused companies everywhere to take note of the admirable way in which the company executives handled the situation. They could have quietly withdrawn suspect batches and stage a cover up. To their great credit, they immediately “went public”. The problem was acknowledged, described in full and warnings were widely broadcast while investigations proceeded. The product was pulled from the shelves, destroyed and not replaced until the cause was established. As a result – “Johnson & Johnson was praised by the media at the time for its handling of the incident. While at the time of the scare the market share of Tylenol collapsed from 35% to 8%, it rebounded in less than a year, a move credited to [the company's] prompt and aggressive reaction” – Wikipedia.org.

Price controls
Price regulation is one of the largest challenges for the Big Pharmas and different countries have widely varying policies. In the United States, the largest and the most attractive pharmaceutical market, there is currently no direct price control for non-government drug sales. it’s worth noting that brand name prescription drug prices rose 9% last year while generic drug prices dropped by 9%. The average American buys 80% of their prescription drugs at brand name prices. The government is also barred from directly negotiating prescription drug prices for most, but not all, of its seven major health care programs. The proposed health reform debate has prompted the government to drive for cost savings in the Medicare program, partially as a result of introducing the ability to negotiate prices directly with the manufacturers. The government is hoping to save $177 billion over the first ten years.

Most European countries control drug prices and downward pressure on prices has been increasing during last years. Japan has even stricter price controls than European countries. All drug prices are controlled by the government and are subject to periodic reviews. As the result of price control, prices of the same products can significantly differ between countries, e.g. between the USA and Canada. Nevertheless, the cost of prescription drugs has risen steadily over the past ten years, outpacing inflation and the growth in Gross Domestic product (GDP).

The Big Pharmas are also using their profits to wield big hammers in the health care debate. As we’ve frequently commented, they contribute huge amounts to the coffers of politicians, presumably not just to educate them about the value of Aspirin. They and the health insurers are spending millions of Dollars a day in advertising campaigns aimed at thwarting the health reform bill. As we reported in Part 1 of this series, they’ve raised their prices by 9 percent over the past year, the largest increase since 1992 and now the kid gloves are off. They’re threatening even larger increases next year, blaming the extra increase on fictitious costs that they’ll incur as a result of the health reform bill, which is primarily about insurance, not drug prices. One could argue that they will make more than adequate profits if they have an extra 44 million insured patients to sell products to.

Legal liability for drug side effects.
Humans and machines are fallible and even after the best endeavors of the pharmaceutical researchers and manufacturers, bad side effects can and do occur. If they are sufficiently serious, there will be legal action, particularly in highly litigious countries, such as the United States. The Big Pharmas can insure against some risks, but they also contribute to various industry and government mandated funds, to ensure payouts in the event that liability and penalties are established. A typical example is The Thalidomide Trust, the government mandated fund set up in the early 1970s in the United Kingdom with money from Distillers Biochemicals. That company was the local licence-holder for production and distribution of Thalidomide, the drug that was found, too late, to cause gross abnormalities in the development of babies born to mothers taking the drug.

There has been some controversy lately over the H1N1 (”Swine”) flu vaccine that has been rapidly designed and manufactured to combat the current pandemic. As we reported a few days ago, the manufacturing process is tried and true and there are no unapproved additives. However, when the government announced a medical emergency they also protected the manufacturers from liability as a result of unforeseen side effects. Unfortunately, they also denied potential victims access to the currently established fund for compensating victims of vaccination accidents.

What’s next?
As we’ve seen above, the Big Pharmas face a whole range of challenges both before and after they bring a drug to market. In the next article we’ll look at the role of patents, which play a huge part in the success and profitability of all pharmaceutical companies.